2 Long-Term Objectives

Learning objectives
After studying this chapter, student should be able to do the following:

 Identify and discuss eight characteristics of objectives.

 Describe ten benefits of having clear objectives.
 Understand the difference between financial and strategic objectives.
 Describe areas decisive for sustainable corporate growth and long-term
prosperity.
 Identify criteria for setting long-term objectives.
 Know how to avoid managing without objectives.
 Characterize SMART Objectives.
 Understand the OKR principle.

Key words
Financial Objectives, Long-term Objectives, Strategic Objectives, Profitability,
Productivity, Competitive Positioning, Employee Development, Employee Relations,
Technological Leadership, Social Responsibility, SMART objectives, OKR principle.

Study time requirements

It is a complex text, the studying takes approximately 2-3 hours of your time.

Contents
2.1 The Nature of Long-Term Objectives
2.2 Characteristics and Benefits of Objectives
2.3 Areas decisive for sustainable corporate growth and long-term prosperity
2.4 Qualities of Long-term Objectives
2.5 SMART Objectives
2.6 Avoid Not Managing by Objectives
2.7 What is an OKR?
Summary
2.1 The Nature of Long-Term Objectives

Long-term objectives represent the results expected from pursuing certain strategies.
Strategies represent the actions to be taken to accomplish long-term objectives. The
time frame for objectives and strategies should be consistent, usually from two to five
years. Without long-term objectives, an organization would drift aimlessly toward some
unknown end. It is hard to imagine an organization or individual being successful
without clear objectives. Success only rarely occurs by accident; rather, it is the result of
hard work directed toward achieving certain objectives.

Long-term objectives are needed at the corporate, divisional, and functional levels of an
organization. They are an important measure of managerial performance. A particular
organization could tailor its guidelines to meet its own needs, but incentives should be
attached to both long-term and annual objectives.

Fig. 3 Long-Term Objectives in Strategic-Management Model

Source: Own processing based on Fred R. David

2.2 Characteristics and Benefits of Objectives

Objectives should be quantitative, measurable, realistic, understandable, challenging,
hierarchical, obtainable, and congruent among organizational units. Each objective
should also be associated with a timeline.

Objectives are commonly stated in terms such as growth in assets, growth in sales,
profitability, market share, degree and nature of diversification, degree and nature of
vertical integration, earnings per share, and social responsibility.
Clearly established objectives offer many benefits. They provide direction, allow
synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts,
stimulate exertion, and aid in both the allocation of resources and the design of jobs.
Objectives provide a basis for consistent decision making by managers whose values
and attitudes differ. Objectives serve as standards by which individuals, groups,
departments, divisions, and entire organizations can be evaluated.

2.2.1 Financial versus Strategic Objectives

Two types of objectives are especially common in organizations: financial and strategic
objectives. Financial objectives include those associated with growth in revenues,
growth in earnings, higher dividends, larger profit margins, greater return on
investment, higher earnings per share, a rising stock price, improved cash flow, and so
on; while strategic objectives include things such as a larger market share, quicker on-
time delivery than rivals, shorter design-to-market times than rivals, lower costs than
rivals, higher product quality than rivals, wider geographic coverage than rivals,
achieving technological leadership, consistently getting new or improved products to
market ahead of rivals, and so on.

Although financial objectives are especially important in firms, oftentimes there is a

trade-off between financial and strategic objectives such that crucial decisions have to
be made. For example, a firm can do certain things to maximize short-term financial
objectives that would harm long-term strategic objectives. To improve financial position
in the short run through higher prices may, for example, jeopardize long-term market
share. And there are other trade-offs between financial and strategic objectives, related
to riskiness of actions, concern for business ethics, need to preserve the natural
environment, and social responsibility issues.

Ultimately, the best way to sustain competitive advantage over the long run is to
relentlessly pursue strategic objectives that strengthen a firm’s business position over
rivals. Financial objectives can best be met by focusing first and foremost on
achievement of strategic objectives that improve a firm’s competitiveness and market
strength.

2.3 Areas decisive for sustainable corporate growth and long-term

prosperity
The eight desired characteristics of objectives were already mentioned in previous text.
Objectives should be:

 quantitative,
 measurable,
 realistic,
 understandable,
 challenging,
 hierarchical,
 obtainable, and
 congruent across departments.
Main goal of strategic managers is achieving sustained corporate growth and
profitability (rather than focus on the short-run profit maximization).

To achieve long-term prosperity, long-term objectives in seven areas need to be

commonly established:

 profitability,
 productivity,
 competitive positioning,
 employee development,
 employee relations,
 technological leadership,
 social responsibility.

2.3.1 Profitability

Profitability is ability of a company to use its resources to generate revenues in excess

of its expenses. In other words, this is a company’s capability of generating profits from
its operations, ability to operate in the long-run depending on attaining an acceptable
level of profits.

Profitability is one of four building blocks for analyzing financial statements and
company performance as a whole. The other three are efficiency, solvency, and market
prospects. Investors, creditors, and managers use these key concepts to analyze how
well a company is doing and the future potential it could have if operations were
managed properly.

The two key aspects of profitability are revenues and expenses. Revenues are the
business income. This is the amount of money earned from customers by selling
products or providing services. Generating income isn’t free, however. Businesses must
use their resources in order to produce these products and provide these services.

Resources, like cash, are used to pay for expenses like employee payroll, rent, utilities,
and other necessities in the production process. Profitability looks at the relationship
between the revenues and expenses to see how well a company is performing and the
future potential growth a company might have.

Strategically managed firms usually have a profit objective: gross profit margin,
operating profit margin, earnings per share, return on equity.

2.3.2 Productivity

Productivity refers to the rate of output per unit of labor, capital or equipment (input).
We can measure it in different ways. We can measure the productivity of a factory
according to how long it takes to produce a specific good. In the services sector, on the
other hand, where units of goods do not exist, it is harder to measure. Some service
companies base their measurement on how much revenue each worker generates. They
then divide that amount by their salary.
In a factory, you can measure it by dividing the total output by the number of workers.
Imagine a table factory that employs 100 people producing 2000 tables per day. The
productivity of each employee is:

2000 (tables) ÷ 100 (workers) = 20 tables per worker per day

Productivity focuses on getting the maximum production per worker or unit of machine
per minute, hour, day, or week, etc. A company can improve output per worker by
investing in better equipment, training its staff, and improving the management of
workers. Also, if workers know there is concern for their well-being, output per head
can improve significantly.

2.3.3 Competitive Positioning

Competitive positioning is about defining how the company will “differentiate” its
offering and create value for the market. It’s about carving out a spot in the competitive
landscape, putting its stake in the ground, and winning mindshare in the marketplace –
being known for a certain “something.”

What sets the product, service and company apart from the competitors? What value
does the particular company provide and how is it different from the alternatives?

In other words we can state that good positioning strategy is influenced by:

 Market profile: size, competitors, stage of growth.

 Customer segments: groups of prospects with similar wants & needs.
 Competitive analysis: strengths, weaknesses, opportunities and threats in the
landscape.
 Method for delivering value: how you deliver value to your market at the highest
level.

When the market clearly sees how the offering is different from that of other
competition, it’s easier to influence the market and win mindshare. Without brand
differentiation it takes more time and budget to entice the market to engage with the
company. As a result many companies end up competing on price – a tough position to
sustain over the long term.

2.3.4 Employee Development

Employee development is defined as a process where the employee with the support of
his/her employer undergoes various training programs to enhance his/her skills and
acquire new knowledge and skills. It is of utmost importance for employees to keep
themselves abreast with the latest developments in the industry to survive the fierce
competition.

Employee development helps in developing and nurturing employees for them to

become reliable resources and eventually benefit the organization. Employees also
develop a sense of attachment towards the organization as a result of employee
development activities.
Benefits of employee development are obvious. In today’s work environment, employee
development is the number 1 factor for employee retention, especially among
Millennials. Top employee development methods used by organizations most frequently
include training programs and leadership development programs. Investments in
employee learning and development directly impact employee engagement and
productivity, improving overall business success metrics.

2.3.5 Employee Relations

The definition of employee relations refers to an organization’s efforts to create and

maintain a positive relationship with its employees. By maintaining positive,
constructive employee relations, organizations hope to keep employees loyal and more
engaged in their work.

Typically, an organization’s human resources department manages employee relations

efforts; however, some organizations may have a dedicated employee relations manager
role. Typical responsibilities of an employee relations manager include acting as a
liaison or intermediary between employees and managers, and either creating or
advising on the creation of policies around employee issues like fair compensation,
useful benefits, proper work-life balance, reasonable working hours, and others. When it
comes to employee relations, an HR department has two primary functions. First, HR
helps prevent and resolve problems or disputes between employees and management.
Second, they assist in creating and enforcing policies that are fair and consistent for
everyone in the workplace.

To maintain positive employee relations, an organization must first view employees as

stakeholders and contributors in the company rather than simply as paid laborers. This
perspective encourages those in management and executive roles to seek employee
feedback, to value their input more highly, and to consider the employee experience
when making decisions that affect the entire company.

2.3.6 Technological Leadership

Leaders Aided by Technology (LATs) use technology to achieve stated goals. For
them, technology is a mean to these ends, a tool that must be employed productively.
LATs have an intuitive feel for the work they do and what it takes to meet their goals.
They seek ways to meet the goals and technology or ways to do so.

Technology leaders view technology leadership in terms of four components; they differ
in how they go about these components. These leaders can assess the value of a genre
or a particular item of technology to a firm’s processes, make reasonably accurate
forecasts of when the general state of technological development will reach a level at
which it can be productively applied to the firm’s activities, manage aspects of the
technology’s life cycle and transfer that technology throughout the organization.

In addition, a technological leader fosters technological innovation (the creation of new

technologies or the discovery of new uses for existing technologies), and understands
the technology life cycle (how technologies appear, grow in use, decrease in value and
need replacement). Leaders initiate and steer commercialization of technological
advances (the former into an external marketplace; the latter into the organization
itself), link business and technology strategies (the former to guide technology creation;
the latter to guide technology financing), manage technology R&D (create new
technologies; find new uses or to motivate new understanding through research).

All technological leaders understand technological revolutions, how disruptive

technologies displace existing ones and what effects this have on business.

2.3.7 Social responsibility

In today's socially conscious environment, employees and customers place a premium

on working for and spending their money with businesses that prioritize corporate social
responsibility (CSR).

Corporate social responsibility refers to business practices involving initiatives that

benefit society. A business's CSR can encompass a wide variety of tactics, from giving
away a portion of a company's proceeds to charity, to implementing "greener" business
operations. CSR is an evolving business practice that incorporates sustainable
development into a company's business model. It has a positive impact on social,
economic and environmental factors.

Recognizing how important socially responsible efforts are to their customers,

employees and stakeholders, many companies now focus on a few broad CSR
categories:

1. Environmental efforts: One primary focus of corporate social responsibility is

the environment. Businesses, regardless of size, have large carbon footprints.
Any steps they can take to reduce those footprints are considered good for both
the company and society.
2. Philanthropy: Businesses can practice social responsibility by donating money,
products or services to social causes and non-profits. Larger companies tend to
have a lot of resources that can benefit charities and local community programs.
It is best to consult with these organizations about their specific needs before
donating.
3. Ethical labor practices: By treating employees fairly and ethically, companies
can demonstrate their social responsibility. This is especially true of businesses
that operate in international locations with labor laws that differ from those in
the United States.
4. Volunteering: Attending volunteer events says a lot about a company's sincerity.
By doing good deeds without expecting anything in return, companies can
express their concern for specific issues and commitment to certain
organizations.

Although being socially responsible isn't free – it can cost time, money and resources –
it is important to remember that every little bit can help the environment.

2.4 Qualities of Long-term Objectives

Five criteria that should be used in preparing long-term objectives are as follow:
  flexible,
 measurable over time,
 motivating,
 suitable,
 understandable.

2.4.1 Flexible

Objectives should be adaptable to unforeseen or extraordinary changes in the firm´s

competitive or environmental forecasts. Objectives allow adjustments in the level rather
than in the nature of objectives.

E.g. HR department objective: providing managerial development training to 15

supervisors per year over the next five-year period. It might be adjusted by changing the
number of people to be trained.

2.4.2 Measurable

Objectives must clearly and concretely state what will be achieved and when it will be
achieved. Should be measurable over time.

E.g. “substantially improve our ROI“ would be better stated as “increase the return on
investment on our line of xxx products by a minimum of 1 per cent a year and a total of
5 per cent over the next three years“.

2.4.3 Motivating

Objectives should be also achievable. Objectives have to be set at a motivating level –

high enough to challenge but not so high as to frustrate or so low as to be easily
attained. On the other hand, there can be a problem in different perception of what is
high enough.

Objectives should be tailored to specific groups, there is no common template how to

motivate and lead.

2.4.4 Suitable

Objectives must be suited to the broad aims of the firm – expressed in its mission
statement. Each objective should be a step toward the attainment of overall goals.
Objectives inconsistent with the company mission can subvert the firm´s aims.

Ten benefits of a company with clear, suitable objectives can be summarized as:

1. Provide direction by revealing expectations.

2. Allow synergy.
3. Aid in evaluation by serving as standards.
4. Establish priorities.
5. Reduce uncertainty.
6. Minimize conflicts.
7. Stimulate exertion.
 8. Aid in allocation of resources.
9. Aid in design of jobs.
10. Provide basis for consistent decision making.

2.4.5 Understandable

Objectives must be clear, meaningful and unambiguous.

Strategic managers at all levels must understand what is to be achieved. They also must
understand the major criteria by which their performance will be evaluated = very
specific KPIs = key performance indicators.

A Key Performance Indicator is a measurable value that demonstrates how effectively a

company is achieving key business objectives. Organizations use KPIs at multiple
levels to evaluate their success at reaching targets. High-level KPIs may focus on the
overall performance of the business, while low-level KPIs may focus on processes in
departments such as sales, marketing, HR, support and others.

One of the most important, but often overlooked, aspects of KPIs is that they are a form
of communication. As such, they abide by the same rules and best-practices as any other
form of communication. Brief, clear and relevant information is much more likely to be
absorbed and acted upon.

2.5 SMART Objectives

The establishment of all objectives should be created using the SMART philosophy.
SMART is an acronym that is used to guide the development of measurable goals.
SMART objectives should seek to answer the question ‘Where do we want to go?’. The
purposes of SMART objectives include:

 To enable a company to control its marketing plan.

 To help to motivate individuals and teams to reach a common goal.
 To provide an agreed, consistent focus for all functions of an organization.

A specific SMART goal has a much greater chance of being accomplished than a
general goal. To set a specific goal the company must answer the six “W” questions:

1. Who: Who is involved?

2. What: What do we want to accomplish?
3. Where: Identify a location.
4. When: Establish a time frame.
5. Which: Identify requirements and constraints.
6. Why: Specific reasons, purpose or benefits of accomplishing the goal.

Each objective should be: Specific, Measurable, Achievable, Realistic, and Time-
oriented.
Specific

Specific answers the questions "What is to be done?" "How will you know it is done?"
and describes the results (end product) of the work to be done. To ensure that an
objective is specific is to make sure that the way it is described is observable.

Measurable

Measurable answers the question "How will you know it meets expectations?" and
defines the objective using assessable terms (quantity, quality, frequency, costs,
deadlines, etc.). It refers to the extent to which something can be evaluated against
some standard.

Achievable/Attainable

Achievable answers the questions "Can the person do it?" "Can the measurable
objective be achieved by the person?" "Does he/she have the experience, knowledge or
capability of fulfilling the expectation?" It also answers the question "Can it be done
giving the time frame, opportunity and resources?" These items should be included in
the SMART objective if they will be a factor in the achievement.

Relevant/Realistic/Reachable

Relevant answers the questions, "Should it be done?", "Why?" and "What will be the
impact?" Is the objective aligned with the corporate implementation plan and the
strategic plan?

Time-oriented/Time-based/Time bound

Time-oriented answers the question, "When will it be done?" It refers to the fact that an
objective has end points and check points built into it. Sometimes a task has several
milestones or check points to help assess how well something is going before it is
finished. These corrections or modifications can be made as needed to make sure the
end result meets expectations.

Setting SMART goals means the managers can clarify their ideas, focus their efforts,
use their time and resources productively, and increase their chances of achieving what
they want.

2.6 Avoid Not Managing by Objectives

Strategists should avoid the following alternative ways of “not managing by
objectives.”

Managing by Extrapolation - adheres to the principle “If it isn’t broke, don’t fix it.”
The idea is to keep on doing the same things in the same ways because things are going
well.

Managing by Crisis - based on the belief that the true measure of a really good
strategist is the ability to solve problems. Because there are plenty of crises and
problems to go around for every person and every organization, strategists ought to
bring their time and creative energy to bear on solving the most pressing problems of
the day. Managing by crisis is actually a form of reacting rather than acting and of
letting events dictate the What and When of management decisions.

Managing by Subjectives - built on the idea that there is no general plan for which way
to go and what to do. Just do the best you can to accomplish what you think should be
done.

Managing by Hope - based on the fact that the future is laden with great uncertainty
and that if we try and do not succeed, then we hope our second (or third) attempt will
succeed. Decisions are predicated on the hope that they will work and the good times
are just around the corner, especially if luck and good fortune are on our side.

Setting goals is key to making progress in any area. It is known that those who write
down their goals are 95 % more likely to achieve them and that two best practices for
goal-setting include making them measurable and giving them a deadline.

2.7 What is an OKR?

The acronym OKR stands for Objectives and Key Results. Objectives are your desired
outcomes, and the key results are the measurable ways to know you’re on track to reach
them.

The development of OKRs is generally attributed to Andy Grove the "Father of OKRs"
and was later popularized by Google. OKRs are now the way many companies like
LinkedIn, Twitter, Uber and more set and achieve goals.

An Objective is a description of a goal to be achieved in the future. The goal of OKR is

to define how to achieve objectives through concrete, specific and measurable actions.
An Objective sets a clear direction and provides motivation and helps answer the
question “Where do I want to go?” It should be ambitious, qualitative, time bound and
actionable by the team.

A Key Result is a metric with a starting value and a target value that measures progress
towards an Objective. A key result helps answer “How will I know I’m getting there?”
They should be measurable and quantifiable, make the objective achievable, lead to
objective grading and should be difficult, but not impossible.

Can be stated that results can be based on growth, performance, revenue and
engagement.

Implementing OKRs:

1) List approx. 3 objectives you want to strive for.

2) For each objective, list 3-4 key results to be achieved.
3) Communicate objectives and key results to everyone.
4) People regularly update each result on a 0-100 % scale.
5) When objective´s results reach 70-80 %, consider it done.
6) Review OKR´s regularly and set new ones.
OKRs may be shared across the organization with the intention of providing teams with
visibility of goals with the intention to align and focus effort. OKRs are typically set at
the company, team, and personal levels although there is criticism on this causing too
much of a waterfall approach, which OKRs in many ways tries to be the opposite of.

Summary

Clear objectives set out what a company wants to achieve from its business activities.
They need to be consistent with overall aims and objectives of the corporate. They also
provide an important focus for the employees.

Provided the business objectives are relevant and achievable, there are some important
business benefits from setting them and monitoring progress against them. Effective
corporate objectives:

 Ensure functional activities consistent with corporate objectives.

 Provide a focus for strategic decision-making and effort.
 Provide incentives for strategic team and a measure of success/failure.
 Establish priorities for strategic resources and effort.

Objectives are essential for organizational success because they state direction in the
first place. They also aid in evaluation, create synergy, reveal priorities, focus
coordination and provide a basis for effective planning, organizing, motivating, and
controlling activities within the company.

Review questions
1. What makes a good business objective?
2. List reasons why objectives are essential for organizational success.
3. In order of importance, list six “characteristics of objectives.”
4. In order of importance, list six “benefits of objectives.”
5. What OKR stands for?

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